MUNIS NOT SAFE INVESTMENTS AS ASSUMED

The individual investor, for as long as one can look back, dominated the municipal bond market. Munis were tax free and, most important, safe. With everything unraveling in front of our eyes – from mortgages to credit to banks – it is no surprise that a new shoe is now dropping – the municipal market. And, it is not a pretty picture.

The whole deal with Richardson resigning as Commerce Secretary Elect is part of this. We are learning every day about corruption and lack of regulations in state and local municipal markets – and it is big stuff and threatens this sector big time. Just yesterday, the government’s chief officer for oversight of this market came forward decrying the lack of regulations. How scary is that! If the person in charge is the one to blow the whistle, we are in real trouble.

Lynnette Kelly Hotchkiss, Executive Director of the Municipal Securities Rule Making Board, drew a parallel between the muni market and the mortgage industry. She said, “you have no level playing field in terms of standards and acceptable rules and behavior.” Now she tells us.

The New York Times has an article on this that is worth reading http://www.nytimes.com/2009/01/10/business/10insure.html?_r=1&ref=business.

If you hold individual bonds, you need to do some hard and fast research. If you invest in bond funds, you need to question the managers fully. And, if you are planning to invest in this market, pick only bonds with absolute and very strong underlying ratings. This market is a mess and will get a lot messier.